Why Tata Sons pledged Rs 2,600 cr worth of shares

On December 24, Tata Sons pledged 11 million shares in Tata Motors, 10 million in Tata Steel and and 15 million in Tata Consultancy Services with Centralbank Financial Services Ltd.

The value of the shares pledged has been calculated in line with their closing price on December 24.

Market experts say group companies often bank on Tata Sons for finance, either to fund an acquisition, or to pay debt. Since 2004, Tata Sons has invested Rs 34,000 crore (Rs 340 billion) in various group companies, including unlisted ventures.

The current move might give Tata Sons Rs 1,300 crore (Rs 13 billion), as 50 per cent finance is available on pledging. It is anticipated the money would be used to pay the debt of Tata Steel, or for an acquisition such as Orient Express by Indian Hotels.

Why Tata Sons pledged Rs 2,600 cr worth of shares

"Tata Sons would infuse the money in Tata Steel through the preferential allotment route. It would be pre-mature to say the money was being raised for Orient Express acquisition," he added.

As of June 30, Tata Steel, the eighth-largest steelmaker globally (by capacity), had $9.3 billion in net debt. Most piled six years ago, when it had acquired the Anglo-Dutch steelmaker Corus for $12.1 billion, now Tata Steel Europe.

CARSs are similar to foreign currency convertible bonds, which can be converted into equity at maturity. If the share price of the company issuing the bonds falls, the investors can ask for repayment in cash.

Why Tata Sons pledged Rs 2,600 cr worth of shares

Tata Sons is the unlisted holding company of the Rs 4.6-lakh-crore (Rs 4.6 trillion) Tata Group. According to its November filing with the registrar of companies, its net profit for 2011-12 fell to Rs 3,146 crore (Rs 31.46 billion) from Rs 3,246 crore (Rs 32.46 billion) a year ago.

Total revenue also dropped to Rs 4,726 crore (Rs 47.26 billion) last financial year from Rs 4,857 crore (Rs 48.57 billion) the year before.

The company's earnings come mainly from dividends received from group companies, and capital gains from the sale of shares.

Tata Sons is known to consolidate stake in group companies when valuations are down in the open market, which it either sells or pledges. Pledging is the main avenue for Tata Sons to raise money.

Pawning

Tata Sons's stake in TCS is around Rs 1.8 lakh crore (Rs 1.8 trillion), 6 per cent of which was pledged at September-end. In comparison, Tata Sons' holding in all listed group companies is Rs 2.4 lakh crore (Rs 2.4 trillion).